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On the effects of bid caps in all-pay auctions

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  • Chen, Bo

Abstract

This paper analyzes the effects of a bid cap in an all-pay auction with incomplete information. I find that a non-trivial bid cap affects an agent’s expected payment in three ways: An “anti-competition effect” which is associated with this agent’s own signal, a pro-competitive “good news effect” which is associated with her opponents’ signals and which alleviates the winner’s curse, and an “inference effect” caused by affiliation of signals. Unlike the former two effects, the “inference effect” is a double-edged sword. It is anti-competitive when the cap is relatively low and pro-competitive when a cap is relatively high.

Suggested Citation

  • Chen, Bo, 2019. "On the effects of bid caps in all-pay auctions," Economics Letters, Elsevier, vol. 177(C), pages 60-65.
  • Handle: RePEc:eee:ecolet:v:177:y:2019:i:c:p:60-65
    DOI: 10.1016/j.econlet.2019.01.027
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    References listed on IDEAS

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    1. Szech, Nora, 2015. "Tie-breaks and bid-caps in all-pay auctions," Games and Economic Behavior, Elsevier, vol. 92(C), pages 138-149.
    2. Jeremy Bulow & Paul Klemperer, 2002. "Prices and the Winner's Curse," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 1-21, Spring.
    3. Todd R. Kaplan & David Wettstein, 2006. "Caps on Political Lobbying: Comment," American Economic Review, American Economic Association, vol. 96(4), pages 1351-1354, September.
    4. Ezra Einy & Ori Haimanko & Ram Orzach & Aner Sela, 2016. "Common-value all-pay auctions with asymmetric information and bid caps," International Journal of Game Theory, Springer;Game Theory Society, vol. 45(1), pages 63-88, March.
    5. Yeon-Koo Che & Ian L. Gale, 2006. "Caps on Political Lobbying: Reply," American Economic Review, American Economic Association, vol. 96(4), pages 1355-1360, September.
    6. Arieh Gavious & Benny Moldovanu & Aner Sela, 2002. "Bid Costs and Endogenous Bid Caps," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 709-722, Winter.
    7. Chen, Bo & Jiang, Xiandeng & Knyazev, Dmitriy, 2017. "On disclosure policies in all-pay auctions with stochastic entry," Journal of Mathematical Economics, Elsevier, vol. 70(C), pages 66-73.
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    Cited by:

    1. Chen, Bo & Ma, Lijun & Zhu, Zhaobo & Zhou, Yu, 2020. "Disclosure policies in all-pay auctions with bid caps and stochastic entry," Economics Letters, Elsevier, vol. 186(C).

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    More about this item

    Keywords

    All-pay auction; Interdependent valuation; Affiliation; Bid cap;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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